Charles Waldegrave: Find a real answer on housing affordability

The Greens, not always practical in these policy areas, have come up with a solution that addresses the problem. Housing affordability has finally thrust itself on to the political agenda, and is becoming one of the main issues for 2013. The National Party, Labour and the Greens have announced policies to address the growing impossibility for Kiwi families to afford their own house.

Inattention to this area by successive governments has created a backlog of pressure which can no longer be avoided.

The critical problem is the cost of the mortgage. The critical question is, "which solutions or policies will provide the game-changer?"

We all know how tough it is for young families on middle incomes to afford to buy a house these days. In the two decades since the 1991 census, home ownership, including family trusts, fell from 74 per cent of all homes to 65 per cent. Although some people on higher incomes choose to rent when they can afford a mortgage, the bulk of the decline in home ownership is because of the escalating cost of housing. Over the past two decades the cost of buying a house has increased at a greater rate than inflation and people's salaries or wages, even after accounting for the slowdown resulting from the global financial crisis.

The Prime Minister began the discussion late last year in response to the Productivity Commission's report that said housing could be made much more affordable.

He and the Minister of Finance have focused on easing land use regulations and development rules by pushing councils, especially Auckland, to ensure more houses are built to meet the demand.

David Shearer has taken up the home ownership cudgels as the central part of Labour's bid to win the next election. He is promising 100,000 affordable houses, 10,000 a year over 10 years.

This all sounds good, but these solutions primarily address the demand for a greater number of houses rather than more accessible home ownership for those on modest incomes.

While the Government pushes for a market solution with freer land use rules, it is hard to see how the cost of a house in Auckland is going to reduce much below $400,000.

Labour says it can get prices down to $300,000-$350,000 by building small apartments and terraced housing. But a mortgage for even these modest dwellings is beyond the reach of many households - especially those on low or middle incomes - with children.

Mr Shearer's key policy will not be effective for many of Labour's constituents.

Greens co-leader Metiria Turei announced at Ratana Pa last week a solution that referenced the first Labour Government's housing policy, and was more in line with Michael Joseph Savage's vision than his party's current solution.

The Greens, not always practical in these policy areas, have come up with a solution that addresses the problem. The problem is the cost of the mortgage. They avoid the mortgage by introducing a shared ownership scheme.

Under this, the Government would build a good quality home cheaply because it can obtain low cost capital.

A family on a modest income would make a weekly payment to cover the cost of the capital and on top of that make flexible payments to the Crown to buy equity in the property.

They give an example of a $300,000 house which the Crown buys at the government bond rate of 3.5 per cent. This would require $200 a week to pay off the capital and another $100 to purchase equity off the Crown. This is a price a family on a modest income could afford, especially if the equity payment could be more or less than $100 depending on the family's financial circumstances.

This shared ownership solution could be a game-changer. It doesn't require a deposit because there is no mortgage, families gain equity flexibly according to their circumstances, the Government spends more on building but the net debt effect is neutral because the house becomes a Crown asset, and it doesn't add to private foreign debt because nothing is borrowed.

Perhaps the political parties could have a focus group together. They all clearly want a solution to the serious problem of housing affordability, but it is a tough and expensive problem. Changing the rules and targeting 100,000 new houses can contribute, but they are underwhelming solutions to the real difficulties of housing affordability for many families.

In the past we had low cost State Advances Corporation mortgages that enabled families on modest incomes to own their own homes. A similar interest rate is possible in a modern economy using the shared ownership model.

By giving the opportunity for a family to buy the equity off the Crown at a rate that suits them, they can start building equity even earlier than under the old State Advances table mortgages. That is worth serious consideration.

Charles Waldegrave is a researcher with the Family Centre Social Policy Research Unit.